BNP Paribas global head of equities and derivatives strategy picks Nikkei then Europe

Former Queenslander Gerry Fowler is based in London where he is global head of ­equity and derivative strategy for France’s biggest bank BNP Paribas.
Photo:Nic Walker

by
Sally Rose

The smart money will be in Japan’s Nikkei over the next three months. The best region for stocks for the next three years will be Europe, where banks are set to be the best-performing sector.

Those are two of the big investment plays BNP Paribas’s global head of ­equity and derivative strategy, Gerry Fowler, was spruiking during a trip to Australia this month. It was the former Queenslander’s third trip home since convincing the French investment bank to let him set up a combined equity and derivatives division based in London three and a half years ago.

“Equity markets in the United States are trading slightly above fair value, while Europe, Japan and emerging market stocks are cheap," he says. “But while corporate profitability is deteriorating across emerging markets, it is improving in Japan and Europe."

After being appointed to his role in 2013, one of Fowler’s first moves was to hire Orrin Sharp-Pierson, a former Citi London colleague, to lead a team of equity strategists to develop BNP’s house view on how stocks might perform in countries, regions and sectors.

Fowler oversees the strategy but focuses on leading a derivatives team responsible for figuring out the most effective way for clients to trade on their macro views. The unit advises the hedge fund managers of BNP Paribas’s major institutional clients. The sell-side adviser’s two biggest clients are Norges Bank, Norway’s central bank, and US firm BlackRock, the world’s biggest funds manager.

Fowler predicts Japan’s Nikkei, currently trading around 14,500 points, will surge above 17,000 by early August before dipping back to around 16,000 while investors assess the strength of the long-awaited “third arrow" of Prime Minister
Shinzo Abe
’s plan to reinvigorate the economy. He argues the first two arrows of “Abenomics", government spending and loose monetary policy, are working but not well enough. The desired “wealth effect", where money switches out of bonds into stocks, is not happening.

Speculation is rife as to whether the Bank of Japan will respond by launching a second round of quantitative easing. Fowler expects the BoJ will increase its stimulus program but not until the end of the year.

The reason he is so bullish on the Nikkei in the short term is that he believes the BoJ will reduce its stimulus directed to bond buying and increase its allocation to domestic equities before the end of June. That would shift the risk-reward ratio between the asset classes and push at least an extra $US1 billion into Japanese shares, Fowler says.

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While uncertain about the outlook for the Nikkei beyond the next few months, the strategist is bullish on European equities long term, tipping the market could climb by as much as 70 per cent over the next two years.

It is a popular view that the European Central Bank should provide more stimulus, but few strategists believe it will act fast enough. So the market is pricing for weakness in European equities, Fowler says. He is confident ECB president Mario “whatever it takes" Draghi will act in time. “The ECB will respond to very low inflation and high unemployment with more quantitative easing by the December quarter."

Since September, Fowler has been talking up opportunities to profit from investing in the troubled European banking sector. He predicts it will be a major beneficiary of a global rotation out of income-yielding stocks into companies demonstrating profitability improvement. “As bond yields rise in emerging markets the appeal of income equities is reduced because you can get similar income at a lower risk from bonds," Fowler says.

Europe’s banking sector is still in bad shape. The average cost of equity is above the average return on equity, but profitability improvement is what matters most, he says.

Buying European banks is a timely trade right now because most people think a series of ECB stress tests and asset quality reviews that are due to report in October will be a negative ­catalyst. While Fowler expects a few of the smaller European banks to fail, he argues improving investor confidence in the majority that pass will buoy the sector. “Aussie banks are much better quality businesses than their European counterparts but they have little room left for improvement over the next few years," he says.

On balance, Fowler expects Australian equities to post a moderate rise this year as gains in the big miners are offset by falls in the big banks. But he is quick to point out there are an abundance of local equity strategists better placed to comment on the ASX.

“Australia is an incredibly sophisticated financial market considering how small the economy is. Partly that’s due to the maturity of the superannuation industry, but also because so many young Aussies working in finance spend a spell working overseas, get experience in deep markets and then want to move home."

Media training has polished away all but a hint of the former Sunshine Coast grommet’s accent and, for the time being at least, he is happy being a world away from Caloundra in Canary Wharf. Still, ideally he wants to move his young family back to Australia for a stint during his two-year-old daughter’s primary school years.

The timing could work out well, given April’s roadshow had an encouraging reception as local ­institutional investors displayed an appetite for a combined equities and derivatives strategy.